Today I'm going to take a look at Aflac (AFL), the Columbus, Ga.-based insurance company. I'm sure you've seen the company's advertisements, with their humorous spokes-duck. This company comes up a lot when speaking with other members of the value crowd, so today we're going to take a look at how Aflac's business is doing.

Aflac was founded and incorporated in 1955. It operates as a holding company which sells a range of health insurance, life insurance and annuity products to its customers in Japan and the U.S. At first glance the company appears fairly cheap, currently selling with a price-to-earnings (PE) ratio of 8.1, price-to-book (P/B) ratio of 2 and a price-to-earnings-to-growth (PEG) ratio of 1.65. These levels seem reasonable, but let's attempt to value the company.

One of my favorite metrics is return on equity (ROE). I want to be sure that the companies I own generating a high rate of return on my equity ownership in the company. You can see the past 10 years of ROE for Aflac below.

These results aren't amazing, I generally like to see ROEs of 20% or more, but they sure are consistent. Next I want to look at Alfac's past revenue growth per share, to see if it has demonstrated “top line” growth. Below you can see the revenue growth per share over the past 10 years.

Okay, good, so Aflac has been able to more than double its revenue per share over the past 10 years. Now let's look at the earnings-per-share (EPS) and free-cash-flow per share (FCF) growth.

From the left side of the table above it's clear that the EPS and FCF have each been growing at roughly 20% per year. This is a very good sign. Sometimes companies will use deceptive accounting practices to boost their EPS, but trickery seems less likely in this case. Also in the table above is my discount cash flow analysis of Aflac's valuation. Based on the historic (10-year) growth rate (assumed to be the slower of EPS and FCF) of 20%, this method of valuation suggests that Aflac's common stock is substantially undervalued.

Based on this valuation Aflac's future earnings have a valuation of $114.48, which is nearly double the current stock price. Please note that when estimating the future insurance and financial stocks I only use 10 years of future earnings. The insurance and financial industries are always evolving, and I feel it is risky to go out and extrapolate more than 10 years into the future. In the past 10 years the dividend has more than quadrupled. The current dividend yield is 2.4%. There is plenty of room for future dividend increases, because the current dividend payout ratio is only 19%.

In summary, it appears Aflac could be a good investment. Of course this is my opinion. Do your own investigation to be sure Aflac fits your financial needs. You also need to ask yourself how regulatory changes or rising interest rates would affect Aflac's business.

Disclosure: I do not own Aflac. This analysis is for informational purposes only and should not be considered a recommendation to buy, sell or hold any equities. The information above is provided by GuruFocus.com and Yahoo Finance.

About the author:

The Fast Letter

The Fast Weekly (fastweekly.blogspot.com) is a blog that discusses where I am finding opportunity in the markets and how I am capitalizing on those opportunities. I also include stories about me and my family, books I found useful, and important investment decisions.

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